World currency unit

The World Currency Unit (WCU) is an indexed unit of account (unit of account) that stands for a unit of stable global purchasing power. Proposed by Lok Sang Ho of Lingnan University, Hong Kong, it was first intended to be the basis for denominating global bonds, a debt instrument that is issued globally and subscribable by people and institutions around the world. Since each unit by design represents a stable unit of purchasing power, the stipulated interest rate on WCU-denominated bonds represents a real interest rate. In principle, the common denomination of bonds by issuers from different parts of the world using the WCU, as well as the greater transparency of real interest rates, will produce more efficient capital markets, as savers and borrowers around the world converge in their understanding of what each basis point of interest means and are protected against two key sources of uncertainty, namely inflation and exchange loss risks.

Irving Fisher in his 1911 book The Purchasing Power of Money had advised that, to serve as a unit of account, a trusted medium of exchange, and a reliable store of value, the purchasing power of money should be stable. Unfortunately, substances that exist by the bounty of nature, such as gold or silver, cannot have such property since their values fluctuate with changing supply and demand. This is the main motivation behind indexed units of account, of which Robert Shiller of Yale University is a principal proponent.

To be meaningful in terms of stable global purchasing power, a WCU will have to represent a basket of global output. By definition, according to the initial proposal by Ho, the WCU represents the sum of the gross domestic products of key market economies in the world, namely the USA, the Eurozone and UK, Japan, Canada, and Australia. Addition of these GDPs, each in a separate currency, is done by converting all GDPs into US dollar values in the base year.

The sum of these GDPs are then scaled down to equal $100 in the base year. The scaling factor then becomes part of the definition of the WCU, as it defines the size of the GDP basket. It is envisaged that every 5 or 10 years, the WCU can be rebased, with the new series using a new base year spliced to the old series much like consumer price indices with different base years are spliced to form a continuous series.

The nominal value of this unit will rise with inflation in each economy. Moreover, the nominal value of this unit will rise if the base currency appreciates against the US dollar. Savers who purchase such bonds not only enjoy protection against inflation, but the benefit of diversification of exchange risks.

The WCU can be used for the pricing of commodities such as oil, precious metals, and agricultural products, which have been quoted in US dollars. Moreover, historical prices in US dollars can be converted into WCU to provide information as to whether the real prices of these commodities have risen or fallen.

Other proposals

Rhett Morson has advocated the Standard Earth Monetary Unit (SEMU) since 1998 and continues to argue in support for it. However, it is not practicable to introduce it in one step for political reasons and so the preferred method of introduction is for countries to gradually move their currencies closer or in some cases to adopt another countries currency as a series of steps inching closer to the SEMU. Examples could include countries that have already adopted the US Dollar as their currency or Australia and New Zealand joining forces or Pacific Islands adopting a larger country's currency.

Ideally, the SEMU would coincide with trade barriers being removed and international laws moving into alignment.

See also

• Special Drawing Rights
• Euro
• Amero
• Afro
• ECO
• AMU

References

• Ho, Lok Sang (2000). "Towards a New International Monetary Order: The World Currency Unit and the Global Indexed Bond" (PDF). The World Economy. 23 (7): 939–950. doi:10.1111/1467-9701.00310. Retrieved 2007-07-03.